How to Reduce a Balance Due Next Year — and Avoid an IRS Underpayment Penalty
This article written exclusively for clients of CWA.tax by Ter and Scott
If you owed money when you filed your most recent tax return, it generally does not mean anything went wrong — it simply means that less tax was paid in during the year than your final computed tax liability after applying credits and deductions.
The good news is that there are straightforward ways to reduce or minimize a balance due next year. This article explains how you can reduce or minimize a balance due on next year’s tax return and outlines the IRS safe harbor rules that can protect you from an underpayment penalty.
Before we dive in, let's start with a basic overview of the Form 1040 tax return. Although tax returns include many schedules and detailed calculations, the first two pages of Form 1040 ultimately bring everything together — summarizing income, deductions, tax liability, credits, and payments. The graphic below shows a very simplified basic structure of how a tax return works.
If you owed money when you filed your most recent tax return, it generally does not mean anything went wrong — it simply means that less tax was paid in during the year than your final computed tax liability after applying credits and deductions.
The good news is that there are straightforward ways to reduce or minimize a balance due next year. This article explains how you can reduce or minimize a balance due on next year’s tax return and outlines the IRS safe harbor rules that can protect you from an underpayment penalty.
Before we dive in, let's start with a basic overview of the Form 1040 tax return. Although tax returns include many schedules and detailed calculations, the first two pages of Form 1040 ultimately bring everything together — summarizing income, deductions, tax liability, credits, and payments. The graphic below shows a very simplified basic structure of how a tax return works.
How W-2 Wage Earners Can Adjust Their Withholding
Many taxpayers who have taxes paid automatically through paycheck withholding during the year might be surprised that they owe tax when their return is filed. Unfortunately, the Form W-4 is imprecise and generally requires annual tweaking.
If you are a W-2 employee, the easiest way to reduce or eliminate a balance due next year is usually to increase your paycheck withholding. For many taxpayers, this only requires a small adjustment if done early in the calendar year.
One thing to keep in mind is that Form W-4 is designed to estimate withholding for the entire calendar year. If you update your Form W-4 later in the year — which is common if you are reading this article during tax season or later in the year if your return was on extension — the form does not automatically account for the months that have already passed. For that reason, the most effective approach is often to request additional withholding per paycheck.
Many taxpayers who have taxes paid automatically through paycheck withholding during the year might be surprised that they owe tax when their return is filed. Unfortunately, the Form W-4 is imprecise and generally requires annual tweaking.
If you are a W-2 employee, the easiest way to reduce or eliminate a balance due next year is usually to increase your paycheck withholding. For many taxpayers, this only requires a small adjustment if done early in the calendar year.
One thing to keep in mind is that Form W-4 is designed to estimate withholding for the entire calendar year. If you update your Form W-4 later in the year — which is common if you are reading this article during tax season or later in the year if your return was on extension — the form does not automatically account for the months that have already passed. For that reason, the most effective approach is often to request additional withholding per paycheck.
A simple way to estimate the adjustment
A practical approach is to use the balance due from the tax return that was just delivered to you.
Example:
Where to enter this on the Form W-4
If you are married
If both spouses work, the extra withholding does not need to come from a specific paycheck.
For example, you could:
The IRS simply looks at the total withholding paid during the year, regardless of which employer (or spouse, if you are married) withheld it.
This approach works best when your income and deductions are relatively similar from year to year. If your income increases significantly — for example through bonuses, investment gains, or stock compensation — you may want to increase withholding further to stay within one of the safe harbor rules discussed above.
Note: There's no limit to the number of times you can adjust your withholding on the Form W-4! You could request an adjustment every pay-period, if desired.
A practical approach is to use the balance due from the tax return that was just delivered to you.
Example:
- Say your tax return shows that you owe $4,000. If you want to minimize a similar balance next year, you could spread that amount across the remaining pay periods in the current year.
- If you are paid monthly and there are 9 months left in the year, you could request approximately $445 of additional withholding per paycheck.
- If you are paid every two weeks and have 19 pay periods remaining, the adjustment would be about $210 per paycheck.
- This gradual increase often closes the gap over the course of the year.
Where to enter this on the Form W-4
- Extra withholding is entered on Form W-4, line 4(c) — “Extra withholding.”
- Many employers also allow you to update withholding through an internal payroll portal, where the field may simply be labeled “additional tax withholding” or something similar.
If you are married
If both spouses work, the extra withholding does not need to come from a specific paycheck.
For example, you could:
- Split the increase between both spouses
- Have one spouse withhold the entire adjustment
- Adjust whichever paycheck is easiest to modify
The IRS simply looks at the total withholding paid during the year, regardless of which employer (or spouse, if you are married) withheld it.
This approach works best when your income and deductions are relatively similar from year to year. If your income increases significantly — for example through bonuses, investment gains, or stock compensation — you may want to increase withholding further to stay within one of the safe harbor rules discussed above.
Note: There's no limit to the number of times you can adjust your withholding on the Form W-4! You could request an adjustment every pay-period, if desired.
The IRS "Safe Harbor" Rules
Many taxpayers are surprised to learn that the US Tax System is a pay-as-you-earn system. That means that income tax is reuired to be paid during the year as income is earned. In other words, filing your tax return in April is generally a reconciliation process — not the actual due date for all of that year’s tax!
If too little tax is paid in during the year through paycheck withholding and/or quarterly estimated tax payments, the IRS can assess an underpayment penalty under Internal Revenue Code.
The good news is that the IRS provides several ways to avoid that penalty. These are commonly referred to as the safe harbor rules.
In general, most taxpayers can avoid an underpayment penalty if at least one of the following is true:
Many taxpayers meet one of these rules automatically through normal paycheck withholding. Let’s walk through what each rule looks like in real life.
Safe Harbor #1: You Owe Less Than $1,000
If the balance due on your return is under $1,000, the IRS generally does not assess an underpayment penalty.
Example
Safe Harbor #2: Pay At Least 90% of Your Current-Year Tax
Another way to avoid penalty is to pay at least 90% of the tax owed for the current year. This method works best when income is relatively stable and predictable.
Example
Safe Harbor #3: Pay 100% of Last Year’s Tax
Many taxpayers prefer to use the prior-year safe harbor, because last year’s tax is a known number. Under this rule, if you pay in at least 100% of the total tax shown on your prior-year return, you generally avoid an underpayment penalty.
Example
Safe Harbor #4: Higher-Income Rule (110% of Prior-Year Tax)
For higher-income taxpayers, the prior-year safe harbor increases slightly. If your prior-year adjusted gross income was above $150,000 (for married couples filing jointly), the safe harbor becomes 110% of last year’s tax.
Example
A Balance Due Doesn’t Mean Something Went Wrong
One of the most common misconceptions about taxes is that a refund means you did things correctly and a balance due means you didn’t. In reality, a refund simply means you paid more tax during the year than you ultimately owed. Many taxpayers actually prefer to keep more of their money during the year and settle the difference when they file their return. As long as you meet one of the IRS safe harbor rules, owing a moderate amount at filing does not trigger a penalty.
The Bottom Line
There is no single “perfect” outcome when filing a tax return. Some taxpayers prefer a refund. Others prefer to break even. And some are comfortable owing a modest amount in April as long as they stayed within the IRS rules.
The key question is simply whether enough tax was paid during the year to avoid an underpayment penalty.
If your income changes significantly during the year — such as receiving bonuses, selling investments, or exercising stock options — a tax projection can help determine whether your withholding should be adjusted.
Many taxpayers are surprised to learn that the US Tax System is a pay-as-you-earn system. That means that income tax is reuired to be paid during the year as income is earned. In other words, filing your tax return in April is generally a reconciliation process — not the actual due date for all of that year’s tax!
If too little tax is paid in during the year through paycheck withholding and/or quarterly estimated tax payments, the IRS can assess an underpayment penalty under Internal Revenue Code.
The good news is that the IRS provides several ways to avoid that penalty. These are commonly referred to as the safe harbor rules.
In general, most taxpayers can avoid an underpayment penalty if at least one of the following is true:
- They owe less than $1,000 when they file, after subtracting withholding and refundable credits
- They paid in at least 90% of their current-year total tax
- They paid in at least 100% of their prior-year total tax
- If their prior-year AGI was above a certain IRS threshold, they paid in at least 110% of their prior-year total tax instead.
Many taxpayers meet one of these rules automatically through normal paycheck withholding. Let’s walk through what each rule looks like in real life.
Safe Harbor #1: You Owe Less Than $1,000
If the balance due on your return is under $1,000, the IRS generally does not assess an underpayment penalty.
Example
- Assume a married couple earned $210,000 during the year.
- Their final federal tax liability ends up being $32,000.
- Throughout the year their employer withheld $31,300 from their paychecks.
- When they file their tax return, they owe $700.
- Even though they owe money, the balance due is less than $1,000, so no underpayment penalty applies.
Safe Harbor #2: Pay At Least 90% of Your Current-Year Tax
Another way to avoid penalty is to pay at least 90% of the tax owed for the current year. This method works best when income is relatively stable and predictable.
Example
- Assume a couple earns $195,000 during the year.
- Their final federal tax liability ends up being $30,000.
- To meet this safe harbor, they would need to pay in at least $27,000 during the year (90% of the total tax).
- If their paycheck withholding totaled $27,500, they would satisfy the safe harbor.
- When they file their return, they would still owe $2,500, but no underpayment penalty would apply.
- This is a common scenario for many wage earners.
Safe Harbor #3: Pay 100% of Last Year’s Tax
Many taxpayers prefer to use the prior-year safe harbor, because last year’s tax is a known number. Under this rule, if you pay in at least 100% of the total tax shown on your prior-year return, you generally avoid an underpayment penalty.
Example
- Assume your 2025 return showed total federal tax of $22,000.
- During 2026, your paycheck withholding totals $22,000.
- But suppose your income increased during the year and your actual 2026 tax ends up being $26,000.
- When you file the return, you would owe $4,000.
- Even though the balance due is larger, you still avoided an underpayment penalty, because you paid in 100% of last year’s tax.
Safe Harbor #4: Higher-Income Rule (110% of Prior-Year Tax)
For higher-income taxpayers, the prior-year safe harbor increases slightly. If your prior-year adjusted gross income was above $150,000 (for married couples filing jointly), the safe harbor becomes 110% of last year’s tax.
Example
- Assume a couple earned $310,000 in the prior year.
- Their total tax on that return was $40,000.
- Because their income exceeded the IRS threshold, their safe harbor target becomes 110% of that amount, or $44,000.
- If their withholding during the next year totals $44,000, they will generally avoid an underpayment penalty — even if their final tax ends up being $48,000 and they owe $4,000 when filing.
A Balance Due Doesn’t Mean Something Went Wrong
One of the most common misconceptions about taxes is that a refund means you did things correctly and a balance due means you didn’t. In reality, a refund simply means you paid more tax during the year than you ultimately owed. Many taxpayers actually prefer to keep more of their money during the year and settle the difference when they file their return. As long as you meet one of the IRS safe harbor rules, owing a moderate amount at filing does not trigger a penalty.
The Bottom Line
There is no single “perfect” outcome when filing a tax return. Some taxpayers prefer a refund. Others prefer to break even. And some are comfortable owing a modest amount in April as long as they stayed within the IRS rules.
The key question is simply whether enough tax was paid during the year to avoid an underpayment penalty.
If your income changes significantly during the year — such as receiving bonuses, selling investments, or exercising stock options — a tax projection can help determine whether your withholding should be adjusted.
